Institutions Sell The Rallies In Toll Brothers Stock 

Toll Brothers (NYSE: TOL) stock is up following the FQ4 results and F2023 guidance but don’t get your hopes up. The reason the stock is down 40% from its peak set last year is the institutions are not likely buyers at this juncture. In fact, given the institutional data for the last 4 quarters, it looks like the institutions have been selling the rallies in 2022 and they will probably do so again because of the guidance. The Toll Brothers' guidance for next year is calling for a massive downtick in volume and pricing that will have a drastic impact on revenue, cash flow, and earnings. 

So, the institutional activity has been vigorous for more than the last year but the takeaway is negative. While the activity smacks of rotation and holdings remain high at 85% of the company, the net activity has been bearish for the last 6 consecutive quarters and providing a headwind for shareholders. 

Toll Brothers Has Great Year, Issues Sour Outlook 

Toll Brothers had a good year and a good Q4 but these results are driven by backlogs and pricing that developed last year and have been spurred by the need to front-run inflation and interest rates. The revenue is up 21% versus last year and came in well ahead of the consensus but driven by the very factors that will crush its results next year. While the average price of homes is up YOY and boosting results in 2022 it is having a negative impact on volume which is having an impact on forward pricing. The company’s delivered home volume rose 13% for the quarter but the new sales and backlog data are not good. 

The company’s signed contract value for Q4, a leading indicator of future results, is down 56% YOY on a 60% decline in volume. This has the value of the backlog down by 7% and the volume by 21% and both are falling. As for guidance, the company issued an expectation for volume to fall 15% to 23% next year and for the average price to fall 11% which will combine to produce a larger 25% to 35% decline in revenue, deleveraging, narrower margins and smaller earnings. None of those things are catalysts to buy this stock and its value may be a trap. 

Toll Brothers And Housing Stocks, A Value Trap? 

Toll Brothers offers a deep value relative to the broad market but this is a trap investors need to avoid. The stock is trading about 5.25X its 2022 earnings and 5.75X the consensus outlook for 2023 but this outlook is too low. Not only that, the FOMC has yet to indicate the end of inflation and interest rate hikes and the odds are high that mortgage rates will hit 10% at some point in early 2023. In this light, the company’s revenue and earnings outlook could be optimistic. The analysts still rate the stock a Hold but both the price target and the consensus rating are slipping. While the Q4 news may cause some excitement in the market, it is not likely to spur bullish commentary from the sell side. 

The Technical Outlook: Toll Brothers At Resistance 

The price action in Toll Brothers moved higher following the Q4 report but the move may already be over. The market hit resistance at the $48 level and that has been a significant price point for the last few months. If the market can get above that level it may move higher but it would not be out of the woods so to speak, with resistance also expected at the $50 level. More likely, the stock will move sideways within its range if not move down to the bottom of the range and set a new low. 

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About Thomas Hughes

[email protected]

Experience

Thomas Hughes has been a contributing writer for InsiderTrades.com since 2019.

Areas of Expertise

Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies

Education

Associate of Arts in Culinary Technology

Past Experience

Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights. 

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